I’ve referenced a great Wikipedia article to give you a rough guide as to how you should break your budget expenses down.
This is a generic set of ratio’s and may not be completely applicable to you, but an incomplete plan can sometimes be better than no plan at all.
If you’ve started your retirement savings late, you may need to contribute more than what is suggested in this article. A good financial adviser can help you understand what your monthly savings figure should be.
Remember that when you apply for finance to buy a house or car, that the lender will approve you up to the maximum that they feel you can afford. This may not be the same as what your budget says. Just because they’re happy to finance you for the maximum, it doesn’t mean that you must take it. Perhaps be a little cautious and take finance for a lower figure.
How many people do you know that get a house, and when interest rates change, can no longer afford the payment and need to sell the house or car and downsize. Selling in these circumstances puts the power in the buyers hands and they often don’t get the price they want.
At the end of February this year, we all will in some way or another need to account for how we’ve spent our money this past year.
You’ll gather all your income together, find out what deductions you’ve made during the year, whether any other expenses are tax deductible, and submit this all to SARS.
Then will come an anxiety driven period to find out if we got it right, and SARS owes us, or if we got it wrong, and we owe SARS!
This is, in a way, a drastic form of a once-off personal budgeting exercise. By spending a little time now, and accurately forecasting your income, expenses, etc now, you’ll soon be in a position to understand how you will look financially for the year. It will often bring the facts out, that we spend to much on unneeded consumables, that we potentially won’t make ends meet, and will show us if we’ll have enough money left to invest.
Any Excel Spreadsheet, Mac Numbers or Google Sheets, has basic budgeting templates to use. There are also more sophisticated on-line programs as well as apps. I’ve listed some below.
Which ever method you decide to use, put a budget in place to guide your financial spending habits. Don’t forget to take into account, the often forgotten once-off items such as vehicle licenses, post box fees, TV license, and any other once items you may have. These “forgotten” items quickly add up and mess with your planned budget.
I’ll provide some basic ratio’s to keep in mind in the next article.
The basic idea is to get your expenses below your income. This is your annual profit. You’ll use this annual profit for investments such as retirement, etc.
You can increase your income in numerous ways, including getting a raise (you hope), working overtime, getting a second job or starting a hobby that pays.
You can decrease your expenses by relooking at your short term premiums and getting a better price, holding off on that new car, purchasing a lower valued car to reduce your monthly repayment, cooking at home more often, etc.
I also suggest looking at using 2 bank accounts. Have one for your salary to be paid into, and for all your debits orders to go off from. Leave the bank card for this at home, give it to your spouse, or break it.
Transfer your monthly spending money into the second account. Once this runs dry, you’ve got no more money for the month. This can help prevent overspending on a monthly basis.
Pay yourself first!!!
Most clients that I speak to, mentally take their income, minus their current expenses, notice they have nothing left, and don’t invest towards a retirement annuity or tax free savings account. If you’ve budgeted for the year and can see what your theoretical profit will be, commit to saving that first.
Once you've done that, and the debit order is in place, you’re less likely to spend it at the end of the month on unneeded luxuries. We’re used to making do with what money we have, so often when other expenses rise, and we don’t get a pay increase, we figure it out.
Put money away as one of your first debit orders for the month, and you’ll soon make a plan to live off the rest.
It should first be understood that a Tax Free Savings Account (TFSA) wasn’t designed specifically for retirement savings whereas a Retirement Annuity (RA) was. A Tax Free Savings Account was designed more for medium to long term savings goals such as a bond deposit, your children’s university education, etc. This was to promote savings in a savings poor South African environment.
It was also hoped that if people utilized this vehicle for savings, they would be less inclined to cash in pension or provident funds when they moved jobs, or were retrenched.
Having said that, I’ve often been asked whether you could use a TFSA to save for retirement.
I guess the short answer is that any savings towards retirement is a step in the right direction.
If you want to compare the long term benefits of each, it depends on your specific circumstances. You can go to the following links and work out for your own circumstances which may give you a slightly better long term outcome.
My suggestion though, is to blend both forms of savings. Your RA will form the basis of your post-retirement nest egg, while the TFSA will provide the top up post-retirement income.
Use the TFSA to save for your medium term goals and your RA for your retirement goals. Once you’ve reached a stage in your life where you no longer need to save for medium term goals e.g. once your kids have finished university, you’ve downsized your house, and you’re playing catch up with your retirement savings, perhaps just continue your contribution to the TFSA along with your contributions to your RA.
By being deliberate about your income withdrawals at retirement, you can reduce your monthly income tax liability but withdrawing from both. this is because withdrawals from an Annuity is taxed as taxable income, whereas withdrawals from a TFSA are tax free. You can thus withdraw the same total amount of monthly income but place yourself in a lower tax bracket.
Below is an excellent video created by Ray Dalio, that breaks down how the economy works, why cycles occur in the economy, and where we stand currently.
I recommend this as a well spent 30 minutes.
You may have heard of your financial adviser sprouting out terms such as asset diversification, different asset classes, Multi-Asset Funds, etc.
What do they mean by this? Perhaps you didn't want to ask in case you felt it was something that you should have somehow known already.
Really what it means, is that you split your exposure and dilute your risk by not only placing your money in one type of asset class.
The different asset classes are:
Each of these classes reacts differently to changes in the economy. If the economy is not growing and shares are more stagnant, Bonds are often growing in value. Cash is consistent but doesn’t allow for much growth above inflation. Property has it’s own ups and downs.
When you are invested in a unit trust portfolio or Exchange Traded Fund, that has this mix, you spread your risk so that your investment doesn’t experience the full fluctuations that only one asset class can exhibit. This can help to ensure that your investment won’t drop as rapidly should the market drop.
You can find more information about this topic at:
How many of you have investments held by different providers?
I bet a few of you, and these have been gathered over the years as you moved from one adviser to another, and one job to another.
Imagine if you could log on to one website to view all your investments!
See how they're growing, how they complement one another as part of your financial goals.
How they track towards these goals, and whether you are on target to reach these goals.
You might have life cover with Old Mutual, a preservation investment with Alexander Forbes, a unit trust with Stanlib, and a retirement annuity with Liberty.
How about your property values, outstanding bond values and savings account bank balances.
Liberty is the first company to offer Liberty Fullview.
Here you can log on to a single platform, link all your investment accounts, and get a single viewpoint of your financial future.
I've sent out email invites to some of you already. If you haven't received it yet, and you're interested, pop me an email or phone call, and I'll get you on board. If you've received the invite, spend 10 minutes of your time and get connected.
It's truly liberating!
This is an important question to ask. By setting a target and sticking to it, you'll be in a position to enjoy your retirement at the age you've selected.
This topic deals with the next 2 questions on the list - What age do you want to retire at, and how much money do you want at retirement.
Remember that it's never too late to start saving, and if your monthly premiums become a cost that you don't think you can afford, rather reduce them, than stop them completely. Let the power of compounding work in your favour. If you don't think you'll hit your goal at your desired retirement age, there are 3 options......
As a rough rule, for every R4000 of income you want at retirement, you need to have saved R1 000 000.
There are many great calculators on the market to work out exactly what you should be saving - including www.liberty.co.za/
Speak to your financial adviser to put a retirement plan in place now and retire comfortably at the age you would like.
This is the first of 10 questions that I ask my clients when we meet to do financial planning. Over the next 10 newsletters we'll unpack each question in more detail.
Each year, your biggest concern can change, and it's important to plan for your biggest worry. This year, it may be to get rid of credit card debt, next year it may be to start saving for your children's education.
You could easily be worried about more than item today, but one must stick out are than the others.
If you can only fix one, which would you choose?
You may not have the budget to put something in place for all your concerns but as Daniel Pink says, tick off your most important task first.
Once that is under control, you can move on to the next most pressing problem.
Interested in chatting about your most pressing problem? Let me know....
Get your retirement savings into place. Each year that you delay putting money away has a long term knock on effect due to the power of compounding. As an example, for every R4000 of retirement income that you want, you need R1 million in retirement savings.
For every year that you save into a company pension or provident fund, you will normally secure 2% of your retirement income. Save for retirement from age 25 to age 65 and you'll have 80% of your retirement secured. Start at 35 and you'll only have 60% of your retirement income secured.
Everyone can afford an extra R500 per month!
Get rid of short term debt!! Overdraft facilities can attract interest rates as high as 23%. Credit card debt is normally around 18%. Make a concerted effort to pay more than the minimum each month and get rid of that debt.
Credit cards should only be used if you can pay the amount in full each month. This helps to create a good credit record. Otherwise credit card availability should be saved for emergency purchases until your emergency fund is in place.... see below.
Get an emergency fund in place. No one knows when unexpected medical expenses may arrive. Similarly when do you plan on unexpected car emergencies, household emergencies, retrenchment etc. It's a good idea to eventually get 3 - 6 months immediate expenses put away for these emergencies.
Yes, this sounds like a large amount of money and may take a few years to get there, but it's better to have this money stashed away earning interest as opposed to using your credit card and pay 18% interest.
The added benefit of this savings, is that if it's not used, it grows over time and can supplement your retirement savings in later life.
Perhaps consider saving until you have 2 months emergency money stashed away and then let compounded interest grow it until it's at 6 months savings and beyond. If you use this money for an emergency, then re-invest into this fund until you have replaced the money you have used.
A tax free savings account can be a great way to stash the cash for your emergency fund. Any withdrawals at retirement, or before, are tax free!!
I'm a financial adviser looking to develop long term relationships with my clients.